ECB Preview: Wake Me Up When September Comes

Summary

• We do not expect the ECB to change policy this week. Nor do we expect much forward guidance – the ECB is watching the data.
• Comments will likely emphasise every meeting is live. We think two cuts by yearend is reasonable.
• This week also brings the final read of the June inflation data. It seems likely to indicate higher wage-intensive services inflation momentum.
• The ECB will probably look through this as a ‘bump’ in the disinflationary road – we think this momentum should fade over summer.

Market Implications

• We still like EUR 2s10s steepening, with a target for the slope of 0bp at the very least.

ECB in Data-Watching Mode

The ECB will decide policy this week. We expect no changes and no forward guidance – so perhaps an uneventful meeting. September could be more interesting.

The ECB’s current line is that they are data-dependent and can look through the recent ‘bumps’ in the disinflationary path (particularly services strength; Chart 1). This is a credible strategy while the ECB’s forecast trajectory holds (Chart 2).

Comments may suggest every meeting is live. This could be modestly dovish, although for now we consider market pricing of around two more cuts this year as reasonable.

Policymaker comments appear to show little dissent on pausing for now and watching the data. Most look for either one or two more cuts this year.

ECB Can Look Through Disinflation ‘Bumps’

Wednesday brings the final June inflation print. No change is expected in the headline and core readings (versus the preliminary estimates), but the national results suggest wage-intensive services inflation momentum could rise again (Chart 3).

While this may seem hawkish, it is unlikely to draw strong comments within the presser. We expect momentum in services to fade over summer on seasonal factors, which the ECB is also likely to look through too.

Data and Surveys

• Monetary policy pass-through has been quite weak: heaviest in Spain and Italy, very low in France and Germany (Chart A1) – HAWKISH.
• ECB estimates for wage growth look reasonable given data (Chart A4) – DOVISH.
• EZ economic surprise indicators have dropped back down (Chart A3) – DOVISH.
• Consumer and business outlooks have stabilised but remain low (Chart A4) – DOVISH.
• The employment outlook has deteriorated (Chart A5) – DOVISH.
• Inflation expectations remain high, but are starting to drop (Chart A6) – MIXED.

Henry Occleston is a strategist who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)